CPA Prep REG

REG Chapter 9 Part 2: Rights, Duties, Legal Obligations and Authority of Owners and Management

Summarize the rights, duties, legal obligations and authority of owners and management.

Final part of the final chapter of Business Law. Just a short lesson here before we dive into federal taxation. Here are today’s learning outcomes:

  • Summarize the rights, duties, legal obligations and authority of owners and management.
  • Identify the rights, duties, legal obligations or authorities of owners or management given a specific scenario.

Overview

The rights, duties, legal obligations and authority of owners and management varies between entities. Key factors like business structure, operating agreements and even size of the company will dictate how a company is operated.

Partnerships

Unless otherwise stated in a partnership agreement, partners’ share in the assets, liabilities, profits and losses are in proportion to their capital contributions. In addition, unless otherwise stated in the partnership agreement, partners will have the right to participate in the day-to-day operations of the business. Here are some key highlights:

  • General partners are both the owners and the management of a partnership.
  • Limited partners are passive investors and sit on the side lines. (In LLPs limited partners are allowed to act like general partners without losing limited liability protection.)
  • Partners must act in the best interest of the partnership.
  • Contracts entered into by partners will generally bind the partnership and the individual partners.
    • Richard signs a promissory note for the purchase of equipment on behalf of XYZ LLP. All partners in the partnership will be liable for the debt even though Richard signed for the loan.
  • Creditors of individual partners won’t be able to claim partnership assets. They will however be able to claim partnership distributions owed to that specific partner.
  • Partners are liable for the actions of other partners unless the partnership is structured as an LLP.

Corporation

As discussed in the previous chapter: shareholders are the owners and choose the board of directors. The board then selects the officers and the officers run the business. Small corporations with few owners will typically have hybrid roles of owners, board members and officers. Here are some key highlights:

Shareholders

  • Shareholders typically have a passive role (Except in instances where few shareholders have majority interest).
  • Don’t have say in the day-to-day operations.
  • Have the right to inspect corporate records to safeguard their interest and ensure management is effectively running the company.
  • Can file a lawsuit against the corporation or its officers for mismanagement or fraud.

Board of Directors

  • Directors have a fiduciary duty to the shareholders.
  • They select the officers (CEO, CFO, CMO, etc.)
  • Must act in good faith.
  • Must be diligent – attend the board meetings, read the financials, know the industry well. This is referred to as the duty of care.
  • Won’t be held liable if they act in good faith.

Officers

  • Officers in charge of the operational functions of the company (day-to-day operations).
  • Officers have the same duties owed to the shareholders as the directors.

Key Highlights

  • Know the different types of roles within a partnership (general partner vs limited partner).
  • Know the different levels of a corporation (Shareholders, Directors and Officers).
  • Have a general sense of these roles and their functions.

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